Revenue Recognition While Doing Accounting

revenueRevenue means gross inflow of cash, receivable or other consideration arising in the course of ordinary activities of an enterprise such as:

  • Sale of goods;
  • Rendering the services;
  • Use of the enterprise resources by others yielding interest, dividends and royalties.

In other words, revenue is charge made to customers or clients for

  1. Goods Supplied.
  2. Rendering Services.

However, revenues from sale or rendering services should be recognized at the time of the sale or rendering of the services. If, at the time of rendering of services or sale there is significant uncertainty in ultimate collection of the revenues, then the revenue’s recognition is postponed and in such cases revenues should be recognized only when it becomes reasonably certain that ultimate collection will be made.


AS – 9 is not applicable to the following revenues or gains arising from –

  • Construction contracts;
  • Hire Purchase, Lease Agreements;
  • Government grants and subsidies;
  • Insurance contracts;
  • Gain realized or unrealized gains. Example – Profit on sale of fixed assets.

Types of revenues

There are mainly 3 types of revenues which can be booked. They are as follows:

  1. Deferred Revenues.
  2. Unearned Revenues.
  3. Accrued Revenues.

Detailed structure of these 3 revenues is described below:

Deferred Revenues is a payment from a customer for either services that have not yet been performed or goods that have not yet been shipped by the recipient. Deferred revenues is recorded as a current liability on the balance sheet.

The initial journal entry is recorded by debiting the cash account and crediting the deferred revenues account. Now, as the recipient earns revenues over time, it reduces the balance in the deferred revenues account (with a debit) and increases the balance in the revenues account (with a credit). This further helps in reducing the tax liability.

Unearned Revenues is prepaid revenue i.e. the customer pays in advance for services that have not yet been performed. Unearned revenues is classified as a current liability in the balance sheet. The initial journal entry is recorded by debiting the cash account and crediting the unearned revenues account  so, as the company earns the revenue, it reduces the balance in the Unearned Revenue’s account (with a debit) and increases the balance in the Revenues account (with a credit). Examples of unearned revenues are:

  • A rent payment made in advance
  • A services contract paid in advance
  • A legal retainer paid in advance
  • Prepaid insurance

Accrued revenue is sales that have not yet been recorded through the normal customer invoicing process, even though they have met all accounting guidelines for revenues recognition. Accrued revenues is not recorded in cash basis accounting, since revenues is only recorded when cash is received from customers.

Revenues accrued is recorded as a Deposit in Balance Sheet and at the same time the amount is shown in the income statement.

Revenue from sale of goods – Revenues from sale of goods is recognized when all the following conditions are fulfilled:

  • Seller has transferred the ownership of goods to buyer for a price or all significant risks and rewards of ownership have been transferred to buyer.
  • Seller does not retain any effective control of ownership of the transferred goods.
  • There is no significant uncertainty in collection of the amount of consideration i.e. cash, receivable etc.

Moreover, in case, delivery of goods is delayed at buyer’s request and buyer takes title and accepts billing, revenues should be recognized immediately but goods must be in the hands of seller, identified and ready for delivery at the time of recognition of revenues.

Revenue from rendering of the services

Revenues from service is generally recognized as the service is performed. The performance of the service is measured by two methods as under:

1.     Completed service contract method – Revenue is recognized when service is about to be completed and no significant uncertainties exist about the collection of amount of service charges.

2.     Proportionate Completion Method – Revenues recognized by reference to the performance of each act. The revenues recognized under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. Further, no significant uncertainty exists about the collection of amount of service charges of performed acts.

Subsequent uncertainty in collection: When uncertainty of collection of revenues arises subsequently after the revenue’s recognition, it is better to make provision for the uncertainty in collection rather than adjustment in already recognized revenue.

When revenue’s recognition is postponed, the disclosure of the circumstances necessitating the postponement should be made.

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